A New Jersey-based real estate tax shelter, which was sold to a number of Washington area investors, is under investigation by the Securities and Exchange Commission.
The SEC has filed for an injunction in Newark federal court against Investors Economic Systems, Inc., the parent, and I.E.S. Management Group Inc., a wholly owned broker-dealer that marketed various tax shelters and investments plans.
Also named in the SEC complaint were Peter J. Bonastia, president of the parent, Thomas C. Gaffney, president of I.E.S. Management, and Barry Simner, a vice president of both. All the defendants live in New Jersey, and the companies are based in Irvington, N. J.
The complicated legal arabesque between the commission and defendants began on June 9. A hearing had been set on an SEC request for a temporary restraining order against the defendants. The SEC also wanted the court to appoint a temporary receiver for the broker-dealer, which SEC investigators alleged was under-capitalized.
But only minutes before the hearing, the two IES corporate entities filed for Chapter XI reorganization under the Bankruptcy Act. This effectively stayed the SEc action against the companies.
John Francis, a Newark attorney, was appointed receiver by the bankruptcy court for the two companies. U.S. District Court Judge Vincent P. Biunno then set a hearing for July 8 on whether he will grant an injuction against the three executives, as requested by the SEC.
Francis, in a telephone interview, said he had frozen the assets of the two companies. And Bonastia claimed he had suspended sales of shares in some 50 limited partnerships not covered under the Chapter XI.
IES sold limited partnerships in-apartment houses, commercial buildings and shopping centers located around the country. the investors would then share in whatever income those properties produced. (Oil drilling tax shelters, among others, were also sold.)
IES has sales outlets here in Kensington and Alexandria, an hundreds of local investors reportedly bought interests.
A number of investors said they bought their limited partnerships through Gale Wallace, who teaches adult education courses in real estate investing in suburban Maryland. Wallace could not be reached, but one of his customers said that he met with him Thursday an that Wallace claimed he himself had invested $60,000. He also told the customer that he had not been paid $20,000 in commisions.
Another investor, Patricia Barren of Silver Spring, said she had invested in three different deals. She received monthly checks from her first two property investments - in New Jersey and Texas. But her most recent real estate investment, in West Virginia, has not paid off, she said.
"I haven't heard anything for three months," she said, "I haven't gotten a letter or anything. Just silence."
Barren said she learned that the property that she put up money for in West Virginia was never purchased.
According to an affidavit filed in the Newark court by the SEC, one limited partnership called Concord Associates II, Ltd. was to own and operate a motel in Lumberton, N.C.
The partnerships were divided into 100 units costing $3,730. each. But the SEC, in the affidavit, claims the motel was never acquired.
In another affidavit, an SEC staff accountant found that in four limited partnership deals, for which $1.8 million was raised, "funds . . . are not reflected on the books of the company and appear to have been disbursed to the parent and other related entities."
Bonastia of I.E.S., while admitting "there are certain problems in each one of the deals" cited by the SEC, added: "They (the deals) will close."
He also said that the majority of the limited partnership were successful. "The properties are there," he said, "and they are doing well, despite what the SEC says."
Bonastia claimed he did not know how many people had invested in the partnership or the dollar volume of business by I.E.S. He did say that 50 per cent of the investors were "executives," 25 per cent "physicians and other professionals," and another 25 per cent "small businessmen and independent contractors."
Apparently there are a number of government employees who invested from the Washington area, according to one source.
Among the well-to-do I.E.S. limited partnerships is Walter Kidde, a son of the founder of the diversified Walter Kidde & Co., Inc.
As in most tax shelters, high-paid athletes are investors. Among them: wrestler Bruno Sammartino, Bruce Laird of the Baltimore Colts and Rick Volt, formerly of the Colts.
The SEC, in its court filings, alleged that the broker-dealer company, I.E.S. Management GGroup, claimed to have $489,000 in capital.